Pegasus Airlines: “As Turkey’s leading Low Cost airline, we have continued to grow in the first nine months of 2013, the year during which we listed on Borsa Istanbul; capitalising on the growth and successes of the past eight years. Remaining steadfast to our nature as a ‘low cost airline’, we have succeeded in reducing our cost-base aggressively and continued to grow and expand our network. In the first nine months of 2013 we decreased our cost per available seat kilometre (CASK) from EUR 4.23 cents to EUR 4.05 cents, translating to a 4.4 per cent reduction. In short, we have succeeded in growing and expanding whilst providing more flight destinations to our guests and creating value for our shareholders," Sertaç Haybat, CEO. Source: Company statement, 12-Nov-2013.

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CAPA's previous analysis of the 3Q2016 results of Europe's big three legacy airline groups highlighted a fall in their collective operating margin, after growth in 1H2016. This report shows that Europe's five leading LCCs, in aggregate, also suffered a fall in profit and margin in the quarter.

Three of the five – Ryanair, Norwegian and Wizz Air – improved their profit margin in the quarter, but easyJet's drop in margin was heavy enough to bring down the collective result. Pegasus' margin also declined.

Nevertheless, the LCC five remain collectively far more profitable than the legacy three. Moreover Europe's two most profitable airlines, Ryanair and Wizz Air, look set to increase their margin lead this year. Even easyJet, which has had a bad year by its standards, achieved a higher margin for calendar 9M2016 than the most profitable of the big three legacy groups, which was IAG.

The divergence of results in the European sector suggest that not all airlines are following the same cycle. However the collective margin decline for the continent's leading LCCs, and its major legacy airline groups, at least gives reason to question whether or not the cyclical upswing may have run its course.

Pegasus Airlines is having a difficult year. Its 2Q2016 results revealed a year on year widening of its operating loss for the third successive quarter. A series of geopolitical and terrorist events in Turkey have weighed on demand for international travel in particular.

Although Pegasus slowed its capacity growth in 2Q, this did not arrest the trend of plunging unit revenue. In spite of low fuel prices, Pegasus has not been able to match the fall in RASK with a sufficient reduction in its unit cost.

In response to its weak 2Q and 1H results, Pegasus has issued a profit warning, lowering its guidance for FY2016 and implying an operating loss for the year. After a number of years of double digit passenger growth, it now targets an increase of only 5%-7% this year (it previously expected 13%-15%). A more cautious approach to growth makes sense in the current environment.